What’s Next For Pepsi Stock After A Mixed Q4 And 6% Fall Last Year?

PepsiCo (NYSE: PEP) reported its Q4 results last week, with revenues missing but earnings beating the street estimates. The company reported revenue of $27.85 billion and adjusted earnings of $1.78 per share compared to the consensus estimates of $28.4 billion and $1.72, respectively. The company continues to face lower volume while pricing continues to rise, weighing on overall consumer demand. We think that PEP stock has little room for growth from its current level of $170. In this note, we discuss PepsiCo’s stock performance, key takeaways from its recent results, and valuation.

PEP stock has witnessed gains of 15% from levels of $150 in early January 2021 to around $170 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. However, the increase in PEP stock has been far from consistent. Returns for the stock were 17% in 2021, 4% in 2022, and -6% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that PEP underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector, including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PEP face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, PEP stock looks like it has little room for growth. We estimate PepsiCo’s Valuation to be $186 per share, reflecting only a 10% upside from its current level of $170. Our forecast is based on a 23x P/E multiple for PEP and expected earnings of $8.19 on a per-share and adjusted basis for the full year 2024. The 23x P/E multiple aligns with the average value over the last four years.

PepsiCo’s revenue of $27.85 billion reflects a 4.5% organic growth driven by a 9% rise in pricing, offsetting a 4% decline in volume. On a GAAP basis, revenues were down 0.5%. Europe organic sales were up 10%, while Africa, Middle East, and South Asia sales were up 11% in Q4, primarily due to favorable foreign currency. Despite adverse currency translation for Latin America, the segment sales were up 8%. The company saw its adjusted operating margin improve 97 bps y-o-y to 11.4% in Q4, partly due to lower impairment charges. Higher revenues (organic) and margin expansion led to a 7% y-o-y rise in the bottom line to $1.78 on an adjusted basis.

Looking forward, the company expects its revenue to rise by at least 4% on an organic basis and at least an 8% rise in adjusted earnings on a constant currency basis. We think that challenging macroeconomic factors and a weak consumer spending environment could weigh on PepsiCo’s near-term performance, and investors will likely be well off waiting for a dip to enter PEP stock for better long-term gains. 

[1] Returns as of 2/14/2024
[2] Cumulative total returns since the end of 2016

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